Tax Return Penalties Are Increasing Your Taxes


As the current tax law says, your tax preparer must be a participant in tax law compliance as they prepare your tax returns. This means that they cannot tack on numbers and guess what to put on your tax return.

The IRS can impose a penalty on your tax return preparer for the following:

  • Failing to do certain administrative tasks
  • Negotiating your tax refund check
  • Neglecting due diligence requirements for certain tax credits
  • Taking unreasonable tax return positions that lead to an understatement of tax

As a small business owner, you should know what your tax preparer needs primarily. This way, you will provide the best information; and therefore, could keep your taxes low. You should also be aware of the information your preparer gathers while preparing and filing your taxes.

If you are worried about getting audited, it is worth knowing the potential penalties your tax preparer could face. In this article, we will talk about what those penalties entail and how they affect your taxes. We will also tell you how your preparer can avoid them in this article.

Administrative Penalties

As a small business owner, you will like the administrative penalties that the law imposes. Unlike compliance and review penalties, they help you with your taxes by providing information on potential mistakes, so that they can be fixed.

The IRS can penalize your preparer $50 per incident, up to a maximum of $25,500 per calendar year, for failing to do the following:

  • Give you a copy of the tax return he or she prepared.
  • Sign the tax return he or she prepared.
  • Put his or her preparer’s tax identification number (PTIN) on the tax return.
  • Keep copies of the prepared tax returns or a list of the prepared tax returns for three years.
  • Keep the name, taxpayer identification numbers, and work location of any tax return preparers he or she employed for three years following the close of that return period.

The $50 per failure does not seem like much on the surface. However, when you consider the possibility of hundreds of penalties over years, you see how this can add up to a significant amount.

Refund Checks

The government wants you to get the full refund you are entitled to, so if your preparer negotiates for a better interest rate by making you a joint filer, that’s big trouble. Any changes like this will incur a $510 penalty. The small initial penalty can have a significant effect over time. If a tax firm has 100 clients and is penalized $510 each year, the company will owe $105,000 in penalties to the IRS by 2032.

As a small business owner, you would like this penalty; because it helps to ensure that you receive your tax refunds diligently.

Due Diligence 

Your tax return preparer must perform extra due diligence to ensure that you qualify for certain tax credits. If not, the penalty is $510 per credit, per year.

The tax credit due diligence requirements apply to

  • the earned income credit,
  • the child tax credit, and
  • the American opportunity tax credit.

Earned income tax credit penalties have been around for a while. The tax year 2016 was an exception since the child and American opportunity credit penalties have joined into dishing out a bit of punishment.

For credits that are subject to penalties, the IRS will only approve your tax deductions if your preparer completes a form 8863 and attaches it to your tax return when you file.

Tax Return Positions 

If your tax preparer takes an unreasonable position on your tax return and that results in an underestimate of taxes, then the IRS will collect more penalties.

The penalty for filing an incorrect tax return often makes tax professionals over-conservative, especially in areas where such professionals are not extensively experienced.

That is the main reason you have a great resource available at Tax Reduction Letter. Most articles are annotated to give you the substantial authority you need to help your tax professionals get comfortable with implementing tax strategies.

When it comes to the IRS, the tax return position penalty makes it likely that your tax preparer will get audited. This is because the process of filling out a return itself is a form of an audit that may release more penalties than if you had filed and just let them find out.

How Preparers Can Defeat the Penalty?

If the IRS comes in with an unreasonable penalty for your business, it is automatically good news that you have a tax professional on your side! They want to get you through this as quickly and efficiently as possible and will collaborate with you to do so.

For all the tax preparer penalties we have gone over so far, the IRS has three years from the date you filed your return to assess them. If your tax preparer can show that the statute of limitations expired, then they cannot assess any penalties.

Your tax return preparer has four additional ways to escape penalties if he or she can show that any one of the following is true:

  • The position had substantial authority.
  • A disclosed position had at least a reasonable basis.
  • There was no understatement of tax.
  • The preparer had reasonable cause and acted in good faith.

In this article, we tried to cover how important to have a good accountant and what is the flip side of not giving proper attention to your tax returns. Visit the website of Manay CPA to have a tax return without penalties. If you want to get consultancy on this subject, you can benefit from the free consultancy service of Manay CPA.

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